With environmental and social issues becoming increasingly important to many Australians, socially responsible investments (SRI) have grown in popularity over recent years.
Socially responsible investing includes ethical, green, sustainable and clean technology investments.
In addition to the normal investment selection and management process, SRI funds also consider a range of factors before deciding whether to invest in any particular company. These may include one or more of the following aspects of the company:
- environmental impact
- social implications
- corporate governance, and/or
- ethical considerations.
Each SRI fund has its own selection process to determine whether to invest in any particular company.
There are a number of different methods fund managers use when evaluating the environmental, social, governance or ethical practices of the companies in which they choose to invest.
Negative screening excludes companies involved in certain industries such as tobacco, arms, alcohol or gambling. However, companies operating within any other sector may be considered.
Positive screening involves selecting companies that have a positive impact on society and the environment. This may include a company involved in renewable energy or healthcare, but it may also include a mainstream energy company with above average environmental, ethical and social practices.
Sustainability analysis is the assessment of all listed companies to determine their environmental, social, governance or ethical performance. This may be used separately or combined with positive and/or negative screening.
Sustainability analysis may take into account:
- media reports of incidents
- research reports including specialist research by NGOs
- company interviews or questionnaires
- analysis of the company’s sustainability report, and/or
- rating companies against international benchmarks.
Best of sector
Best of sector funds invest across all industries (with no negative screening) but only select the most socially and environmentally responsible companies within each industry.
The philosophy of best of sector is that all industries must strive toward sustainability, including those considered harmful or unsustainable.
Best of sector is based on the belief that companies with strong sustainability credentials are generally better managed, and therefore more profitable in the long run.
Engaging with companies
Some SRI fund managers engage with the companies in which they invest to seek improvements in environmental, social and governance issues.
SRI funds may also collaborate on common issues to bring about positive changes within a company.
How do SRI funds perform?
While choosing socially responsible investments may be good for your conscience, are they a worthwhile investment?
Traditionally, perceptions about SRI funds have been that they don’t perform as well as other funds because:
- they are restricted in the companies they can invest in and therefore exposed to greater risk and higher volatility
- they have fewer opportunities for diversification, and
- addressing social, environmental and corporate governance increases company costs.
The performance of SRI funds however has been shown to be similar to that of non-SRI funds.